CFA Practice Question

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CFA Practice Question

If potential output exceeds aggregate demand, eventually ______

A. input prices will rise and output will fall.
B. both input prices and output will rise.
C. input prices will fall and output will rise.
Correct Answer: C

In a recessionary gap, the demand for inputs is low, causing input prices to fall. As input prices fall, so do output prices; this causes an increase in aggregate demand and output.

User Contributed Comments 4

User Comment
achu NOTE: In a recessionary gap, the demand for inputs is LOW, causing input prices to FALL.
babycdq can anyone explain this? Potential output exceeds AD.Then the suppliers will decrease the product they provided. Then the output will fall. Which will also cause the cost of supply increase. Isn't it?
aabensan Someone, please explain. I'm confused. TIA!
khalifa92 just think about it logically without trying hard; if we are behind the potential means we are in a recession,
we are either in stagflation or normal recession but since nothing mentioned about a stagflation means normal recession. and low prices and output are characteristics of a recession.
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